10/05/2009

Lower-tier subcontractors performing work on government contracts sometimes stand in a difficult position: exposed to the same government compliance requirements as prime contractors, but lacking the direct contractual relationships necessary to obtaining legal recourse in the event that something goes wrong.

The case of CLP Resources, Inc., v. Kentucky Bluegrass Contracting, LLC[1]demonstrates some of the difficulties lower-tier contractors face in pursuing claims under government contracts. Kentucky Bluegrass Contracting was hired by as second-tier (or “sub-subcontractor”) on a U.S. Corps of Engineers contract to construct buildings and housing on Fort Sill, near Lawton, Oklahoma. After Kentucky Bluegrass was sued by a third-tiercontractor, it brought claims against the prime contractor and its surety[2] for breach of contract, recovery against bonds, and indemnification.

However, as a second-tier subcontractor, Kentucky Bluegrass lacked the contractual relationship (“privity”) with the prime contractor and its surety necessary to bring a contract claim. As a result, Kentucky Bluegrass was left to argue that principles of justice and equity necessitated recovery – a high standard. Chief Judge Vicki Miles-LaGrange of the U.S. District Court for the Western District of Oklahoma dismissed Kentucky Bluegrass’ claims, finding that – in the absence of a direct contract – Kentucky Bluegrass’ complaint was “devoid of any factual allegation which could plausibly establish either an implied contract or a quasi-contract” between Kentucky Bluegrass and the prime contractor or its surety.

Could Kentucky Bluegrass have sued the U.S. Government instead of the other contractors? Probably not. Under most circumstances, courts lack jurisdiction under the Contract Disputes Act to hear claims by subcontractors against the Government. The exception to the rule is when the subcontractor becomes a “third party beneficiary” to the Government/prime contractor contract, which typically requires that the prime contractor has acted on the government’s behalf in selecting the subcontractor. See Appeal of FloorPro, Inc., ASBCA No. 54143, March 30, 2004. Alternatively, subcontractors can pursue “pass through” claims against the government, though this requires the participation of the prime contractor.

As the Kentucky Bluegrass case shows, one of the primary benefits of being a government subcontractor – the lack of a contractual obligation to the Government – can also be a curse. Contractors should be aware that while subcontracting can be an excellent means of entering the government marketplace, privity requirements may pose an obstacle to pursuing claims against the Government and other contractors in the event that something goes wrong.

[2] The Miller Act provides that a prime contractor on a federal construction project must post a payment bond to protect those who have a direct contractual relationship with either the prime contractor or a first-tier subcontractor. 40 U.S.C. §3133(b)(2).

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